Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 4 The Meaning of Interest Rates
4.1 Measuring Interest Rates
1) The concept of ________ is based on the common-sense notion that a dollar paid to you in the
future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
2) The present value of an expected future payment ________ as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected
3) An increase in the time to the promised future payment ________ the present value of the
payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
4) With an interest rate of 6 percent, the present value of $100 next year is approximately
A) $106.
B) $100.
C) $94.
D) $92.
5) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?
A) $453.51
B) $500.00
C) $476.25
D) $550.00
6) If a security pays $55 in one year and $133 in three years, its present value is $150 if the
interest rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
7) To claim that a lottery winner who is to receive $1 million per year for twenty years has won
$20 million ignores the process of
A) face value.
B) par value.
C) deflation.
D) discounting the future.
8) A credit market instrument that provides the borrower with an amount of funds that must be
repaid at the maturity date along with an interest payment is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
9) A credit market instrument that requires the borrower to make the same payment every period
until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
10) Which of the following are TRUE of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
11) A fully amortized loan is another name for
A) a simple loan.
B) a fixed-payment loan.
C) a commercial loan.
D) an unsecured loan.
12) A credit market instrument that pays the owner a fixed coupon payment every year until the
maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
13) A ________ pays the owner a fixed coupon payment every year until the maturity date, when
the ________ value is repaid.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
14) The ________ is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value
15) When talking about a coupon bond, face value and ________ mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value
16) The dollar amount of the yearly coupon payment expressed as a percentage of the face value
of the bond is called the bond’s
A) coupon rate.
B) maturity rate.
C) face value rate.
D) payment rate.
17) The ________ is calculated by multiplying the coupon rate times the par value of the bond.
A) present value
B) face value
C) coupon payment
D) maturity payment
18) If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon
payment every year is
A) $37.50.
B) $3.75.
C) $375.00.
D) $13.75
19) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every
year is
A) $650.
B) $1,300.
C) $130.
D) $13.
20) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
A) 5 percent.
B) 8 percent.
C) 10 percent.
D) 40 percent.
21) A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of
A) .6 percent.
B) 5 percent.
C) 6 percent.
D) 10 percent.
22) All of the following are examples of coupon bonds EXCEPT
A) corporate bonds.
B) U.S. Treasury bills.
C) U.S. Treasury notes.
D) U.S. Treasury bonds.
23) A bond that is bought at a price below its face value and the face value is repaid at a maturity
date is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
24) A ________ is bought at a price below its face value, and the ________ value is repaid at the
maturity date.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
25) A discount bond
A) pays the bondholder a fixed amount every period and the face value at maturity.
B) pays the bondholder the face value at maturity.
C) pays all interest and the face value at maturity.
D) pays the face value at maturity plus any capital gain.
26) Examples of discount bonds include
A) U.S. Treasury bills.
B) corporate bonds.
C) U.S. Treasury notes.
D) municipal bonds.
27) Which of the following are TRUE for discount bonds?
A) A discount bond is bought at par.
B) The purchaser receives the face value of the bond at the maturity date.
C) U.S. Treasury bonds and notes are examples of discount bonds.
D) The purchaser receives the par value at maturity plus any capital gains.
28) The interest rate that equates the present value of payments received from a debt instrument
with its value today is the
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
29) Economists consider the ________ to be the most accurate measure of interest rates.
A) simple interest rate.
B) current yield.
C) yield to maturity.
D) real interest rate.
30) For simple loans, the simple interest rate is ________ the yield to maturity.
A) greater than
B) less than
C) equal to
D) not comparable to
31) If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan
amount is
A) $1000.
B) $1210.
C) $2000.
D) $2200.
32) For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is
A) $10,030.
B) $10,300.
C) $13,000.
D) $13,310.
33) If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the
interest rate is
A) 5 percent.
B) 10 percent.
C) 22 percent.
D) 25 percent.
34) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it
sells for $200?
A) 9 percent
B) 10 percent
C) 11 percent
D) 12 percent
35) The present value of a fixed-payment loan is calculated as the ________ of the present value
of all cash flow payments.
A) sum
B) difference
C) multiple
D) log
36) Which of the following are TRUE for a coupon bond?
A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
B) The price of a coupon bond and the yield to maturity are positively related.
C) The yield to maturity is greater than the coupon rate when the bond price is above the par
value.
D) The yield is less than the coupon rate when the bond price is below the par value.
37) The ________ of a coupon bond and the yield to maturity are inversely related.
A) price
B) par value
C) maturity date
D) term
38) The price of a coupon bond and the yield to maturity are ________ related; that is, as the
yield to maturity ________, the price of the bond ________.
A) positively; rises; rises
B) negatively; falls; falls
C) positively; rises; falls
D) negatively; rises; falls
39) The yield to maturity is ________ than the ________ rate when the bond price is ________
its face value.
A) greater; coupon; above
B) greater; coupon; below
C) greater; perpetuity; above
D) less; perpetuity; below
40) The ________ is below the coupon rate when the bond price is ________ its par value.
A) yield to maturity; above
B) yield to maturity; below
C) discount rate; above
D) discount rate; below
41) A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
42) Which of the following $1,000 face-value securities has the highest yield to maturity?
A) a 5 percent coupon bond selling for $1,000
B) a 10 percent coupon bond selling for $1,000
C) a 12 percent coupon bond selling for $1,000
D) a 12 percent coupon bond selling for $1,100
43) Which of the following $5,000 face-value securities has the highest yield to maturity?
A) a 6 percent coupon bond selling for $5,000
B) a 6 percent coupon bond selling for $5,500
C) a 10 percent coupon bond selling for $5,000
D) a 12 percent coupon bond selling for $4,500
44) Which of the following $1,000 face-value securities has the highest yield to maturity?
A) a 5 percent coupon bond with a price of $600
B) a 5 percent coupon bond with a price of $800
C) a 5 percent coupon bond with a price of $1,000
D) a 5 percent coupon bond with a price of $1,200
45) Which of the following $1,000 face-value securities has the lowest yield to maturity?
A) a 5 percent coupon bond selling for $1,000
B) a 10 percent coupon bond selling for $1,000
C) a 15 percent coupon bond selling for $1,000
D) a 15 percent coupon bond selling for $900
46) Which of the following bonds would you prefer to be buying?
A) a $10,000 face-value security with a 10 percent coupon selling for $9,000
B) a $10,000 face-value security with a 7 percent coupon selling for $10,000
C) a $10,000 face-value security with a 9 percent coupon selling for $10,000
D) a $10,000 face-value security with a 10 percent coupon selling for $10,000
47) A coupon bond that has no maturity date and no repayment of principal is called a
A) consol.
B) cabinet.
C) Treasury bill.
D) Treasury note.
48) The price of a consol equals the coupon payment
A) times the interest rate.
B) plus the interest rate.
C) minus the interest rate.
D) divided by the interest rate.
49) The interest rate on a consol equals the
A) price times the coupon payment.
B) price divided by the coupon payment.
C) coupon payment plus the price.
D) coupon payment divided by the price.
50) A consol paying $20 annually when the interest rate is 5 percent has a price of
A) $100.
B) $200.
C) $400.
D) $800.
51) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is
A) 2.5 percent.
B) 5 percent.
C) 7.5 percent.
D) 10 percent.
52) The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on
long-term coupon bonds. It is called the ________ when approximating the yield for a coupon
bond.
A) current yield
B) discount yield
C) future yield
D) star yield
53) The yield to maturity for a one-year discount bond equals the increase in price over the year,
divided by the
A) initial price.
B) face value.
C) interest rate.
D) coupon rate.
54) If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its
yield to maturity is
A) 5 percent.
B) 10 percent.
C) 50 percent.
D) 100 percent.
55) If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield
to maturity is
A) 0 percent.
B) 5 percent.
C) 10 percent.
D) 20 percent.
56) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to
maturity of
A) 3 percent.
B) 20 percent.
C) 25 percent.
D) 33.3 percent.